• by  • October 11, 2017 • Doric II

    QUARTERLY FACT SHEET

    30 September 2017

    DORIC NIMROD AIR TWO LIMITED

    LSE: DNA2

    The Company

    Doric Nimrod Air Two Limited (“the Company”) is a Guernsey domiciled company, which was listed on the Specialist Fund Segment (SFS) of the London Stock Exchange’s Main Market on 14 July 2011 with the admission of 72.5 million Ordinary Shares at an issue price of 200p per share. On 27 March 2012, the Company issued 100,250,000 C Shares at 200p per share. With effect from 6 March 2013, the C Shares were converted into Ordinary Shares. One Ordinary Share has been received for every one C Share, resulting in 172,750,000 Ordinary Shares in total. The market capitalisation of the Company was GBP 388.9 million as of 30 September 2017.

    The Company has four wholly-owned subsidiaries: MSN077 Limited, MSN090 Limited, MSN105 Limited and Doric Nimrod Air Finance Alpha Limited (“DNAFA”).

    Investment Strategy

    The Company’s investment objective is to obtain income returns and a capital return for its shareholders by acquiring, leasing and then selling a portfolio of aircraft. The Company receives income from the leases and targets a gross distribution to the shareholders of 4.5 pence per share per quarter (amounting to a yearly distribution of 9.0% based on the initial placing price of 200p per share). It is anticipated that income distributions will continue to be made quarterly.

    The total return for a shareholder investing today (30 September 2017) at the current share price consists of future income distributions during the remaining lease duration and a return of capital at dissolution of the Company. The latter payment is subject to the future value and the respective sales proceeds of the aircraft, quoted in US dollars and the USD/GBP exchange rate at that point in time. Since launch, three independent appraisers have provided the Company with their future values for the aircraft at the end of each financial year. The latest appraisals available are dated the end of March 2017. The table below summarises the total return components, calculated on different exchange rates and using the average value of the aircraft as provided by the three independent external appraisers.

    The contracted lease rentals are calculated and paid in US dollars to satisfy debt interest and principal, and in sterling to satisfy dividend distributions and Company running costs, which are in sterling. The Company is, therefore, insulated from foreign currency market volatility during the term of the leases.

    With reference to the following two tables, there is no guarantee that the aircraft will be sold at such a sale price or that such capital returns would be generated. It is also assumed that the lessee will honour all its contractual obligations during the entire anticipated lease term:

    I. Implied Future Total Return Components Based on Appraisals

    The implied return figures are not a forecast and assume the Company has not incurred any unexpected costs.

     

    Aircraft portfolio value at lease expiry according to

     

    ·      Prospectus appraisal                      USD 863 million

    ·      Latest appraisal1                                              USD 813 million

     

    Per Share
    (rounded)

     

    Income Distributions

    Return of Capital

    Total Return2

    Prospectus Appraisal

    Latest
    Appraisal3

    Prospectus Appraisal

    Latest
    Appraisal3

    Prospectus FX Rate4

    126p

    322p

    308p

    449p

    434p

    Current FX Rate5

    126p

    370p

    353p

    496p

    479p

    1 Date of valuation: 31 March 2017

    2 Includes future dividends

    3 Average of the three appraisals as at the end of the Company’s respective fiscal years in which each of the leases reached the end of their respective 12-year terms

    4 1.56 USD/GBP Initial Admission / 1.53 USD/GBP C Shares Admission

    5 1.3398 USD/GBP (30 September 2017)

    II. Company Facts (30 September 2017)

    Listing

    LSE

    Ticker

    DNA2

    Current Share Price

    225.13p (closing)

    Market Capitalisation

    GBP 388.9 million

    Initial Debt

    USD 1.03 billion

    Outstanding Debt Balance

    USD 553.9 million (54% of Initial Debt)

    Current/Future Anticipated Dividend

    4.5p per quarter (18p per annum)

    Earned Dividends

    98.0p

    Current Dividend Yield

    8.00%

    Dividend Payment Dates

    April, July, October, January

    Total Expense Ratio

    1.3% (based on Average Net Assets)

    Currency

    GBP

    Launch Date/Price

    14 July 2011 / 200p

    Average Remaining Lease Duration

    6 years 10 months

    C Share Issue Date/Price

    27 March 2012 / 200p

    C Share Conversion Date/Ratio

    6 March 2013 / 1:1

    Incorporation

    Guernsey

    Aircraft Registration Numbers
    (Lease Expiry Dates)

    A6-EDP (14.10.2023), A6-EDT (02.12.2023), A6-EDX (01.10.2024), A6-EDY (01.10.2024), A6-EDZ (12.10.2024), A6-EEB (09.11.2024), A6-EEC (30.11.2024)

    Asset Manager

    Doric GmbH

    Corp & Shareholder Advisor

    Nimrod Capital LLP

    Administrator

    JTC Fund Solutions (Guernsey) Ltd

    Auditor

    Deloitte LLP

    Market Makers

    Jefferies International Ltd,

    Numis Securities Ltd,

    Shore Capital Ltd,

    Winterflood Securities Ltd,

    Canaccord Genuity Ltd

    SEDOL, ISIN

    B3Z6252, GG00B3Z62522

    Year End

    31 March

    Stocks & Shares ISA

    Eligible

    Website

    www.dnairtwo.com

    Asset Manager’s Comment

    1. The Assets

    The Company acquired a total of seven Airbus A380-861 aircraft between October 2011 and November 2012. Each aircraft is leased to Emirates Airline (“Emirates”) – the national carrier owned by the Investment Corporation of Dubai, based in Dubai, United Arab Emirates – for an initial term of 12 years from the point of delivery, with fixed lease rentals for the duration. In order to complete the purchase of the first three aircraft, MSN077 Limited, MSN090 Limited and MSN105 Limited entered into three separate loans, each of which will be fully amortised with quarterly repayments in arrear over 12 years.

    The net proceeds from the C Share issue (“the Equity”) were used to partially fund the purchase of four of the seven Airbus A380s. In order to help fund the acquisition of these final four aircraft, DNAFA issued two tranches of enhanced equipment trust certificates (“the Certificates” or “EETC”) – a form of debt security – in June 2012 in the aggregate face value of USD 587.5 million. DNAFA used the proceeds from both the Equity and the Certificates to finance the acquisition of four new Airbus A380 aircraft leased to Emirates.

    The seven Airbus A380 aircraft bearing manufacturer’s serial numbers (MSN) 077, 090, 105, 106, 107, 109 and 110.

    The seven A380s owned by the Company recently visited Abu Dhabi, Amsterdam, Auckland, Bangkok, Barcelona, Bangkok, Beijing, Casablanca, Dublin, Frankfurt, Hong Kong, Jeddah, Kuwait City, London Heathrow, Madrid, Melbourne, Milan, Moscow, New York JFK, Paris, Perth, Shanghai, Sydney and Washington.

    Aircraft utilisation for the period from delivery of each Airbus A380 until the end of August 2017 was as follows:

    MSN

    Delivery Date

    Flight Hours

    Flight Cycles

    Average Flight Duration

    077

    14/10/2011

    27,212

    3,208

    8 h 30 min

    090

    02/12/2011

    24,617

    4,070

    6 h 5 min

    105

    01/10/2012

    21,697

    3,508

    6 h 10 min

    106

    01/10/2012

    23,955

    2,774

    8 h 40 min

    107

    12/10/2012

    23,622

    2,761

    8 h 35 min

    109

    09/11/2012

    20,677

    3,323

    6 h 15 min

    110

    30/11/2012

    21,000

    3,485

    6 h

    Maintenance Status

    Emirates maintains its A380 aircraft fleet based on a maintenance programme according to which minor maintenance checks are performed every 1,500 flight hours, and more significant maintenance checks (C checks) at 24 month or 12,000 flight hour intervals, whichever occurs first. Emirates bears all costs relating to the aircraft during the lifetime of the lease (including maintenance, repairs and insurance).

    Inspections

    Doric, the asset manager, performed inspections of MSNs 105, 106, 107 and 109 in September 2017. The final reports were not available at the editorial deadline.

    2. Market Overview

    In the first seven months of 2017, global revenue passenger kilometres (RPKs) grew by 7.7% compared to the same period in the previous year. The robust end to 2016 provided for a favourable start for RPK growth rates in 2017. However, IATA notes that the upward trend in seasonally-adjusted (SA) passenger traffic has slowed since the end of 2016. While industry-wide RPKs were growing at an annualized rate of more than 12% coming into 2017, that growth has begun to slow to around 6% over the past three months. This annualized growth rate falls between its five-year and ten-year averages (6.4% and 5.5%, respectively).

    During the first seven months of this year, industry-wide available seat kilometres (ASKs) increased by 6.1%. As ASKs and RPKs have trended upward at similar rates, the global passenger load factor (PLF) rose by 1.2 percentage points in the first seven months of 2017, resulting in a PLF of 81.3%. All regions, except for the Middle East, recorded increases in PLF in the first seven months of 2017 compared to the same period in 2016. PLF in the Middle East decreased by 0.2 percentage points to 74.7% during this period.

    International RPKs flown by Middle Eastern airlines have grown by 7.0% in the first seven months of 2017, compared with the five-year average of 11.2%. Adjusting for the later timing of Eid this year, which could have led to a jump in July on a month-on-month basis, SA traffic volumes are still level with where they started this year. In particular, the Middle East to North America market continues to feel the effects of a combination of factors, including the (recently-lifted) ban on personal electronic devices (PED) as well as the proposed travel bans to the US. Traffic growth on the segment was already slowing in early-2017, in line with the slowing growth rate of non-stop services flown by the largest Middle Eastern airlines. However, in June, RPKs on these routes between the Middle East and North America fell for the fourth consecutive month in year-on-year terms (-6.8%).

    With an RPK growth of 10.2% until July 2017 Asia/Pacific-based operators outperformed the overall market demand this year. Europe ranked second with 8.6% and Africa third with 7.7%, ahead of Latin America (6.8%). With a combined domestic and international RPK growth of 6.7% the Middle East reached the second-last place, with North America achieving 3.9%.

    For 2017, IATA forecasts that the airlines fuel bill will rise to USD 129 billion and represent 18.8% of average operating costs. As jet fuel prices have begun to rise with oil prices, IATA expects an average price of USD 64 per barrel of jet fuel during 2017.

    © International Air Transport Association, 2017. Air Passenger Market Analysis July 2017, Air Passenger Market Analysis June 2017, Economic Performance of the Airline Industry, 2017 Mid-Year Report. All Rights Reserved. Available on the IATA Economics page.

    3. Lessee – Emirates Key Financials

    In the 2016/17 financial year ending on 31 March 2017, Emirates recorded the 29th consecutive year of profit with a net result of USD 340 million (AED 1,250 million), down 82% compared to the previous financial year. The net profit margin was 1.5%, down by 7 percentage points. Revenue for the period remained unchanged at USD 23.2 billion (AED 85.1 billion). However, lower results were to be expected as Emirates’ president Tim Clark hinted earlier in March 2017 that the increased volatility in the market had affected Emirates’ performance. His Highness Sheikh Ahmed bin Saeed Al Maktoum, Chairman and Chief Executive of Emirates, listed a number of destabilizing events, which impacted travel demand during the year: the Brexit vote, Europe’s immigration challenges and terror attacks, new policies impacting air travel into the US, and currency devaluation. He deemed the past fiscal year as “one of our most challenging years to date”.

    In the face of these challenges, Emirates increased its passenger numbers, RPKs and cargo carried during the 2016/17 financial year. Emirates carried a record 56.1 million passengers (8.1% more than in the previous fiscal year), increased capacity for passengers (measured in ASK) by 10.3% and increased RPKs by 8.4%. As a result, the passenger seat factor dropped by 1.4 percentage points to 75.1%. In the 2016/17 annual report it was noted that seat factor on the Emirates’ A380 fleet was high – and a testament of the customer preference for this aircraft. The share of passengers carried on an A380 increased by 5 percentage points to 37%.

    The costs resulting from the ongoing efforts to expand capacity contributed to a 7.7% increase in operating costs. While fuel prices fell by 2%, an 8% uplift in line with the capacity increase led the airline’s fuel bill to increase 6%. Fuel costs as a percentage of operating costs only slightly decreased from 25.7% to 25.4% during the reporting period, remaining the biggest cost component for the airline, followed by personnel costs. The overall increase in operating costs is marginally higher than the capacity growth of 7.2%, measured in available tonne kilometre.

    As of 31 March 2017, the balance sheet totalled USD 33.1 billion (AED 121.6 billion), an increase of 2% compared to the previous financial year. Total equity increased by 8.3% to USD 9.6 billion (AED 35.1 billion) with an equity ratio of nearly 29%. The carrier had a cash balance of USD 4.3 billion (AED 15.7 billion) at the end of the period, down by USD 1.2 billion (AED 4.3 billion) compared to the previous financial year. This included the repayment of bullet bonds in the amount of USD 1.1 billion. The current ratio stood at 0.73, meaning the airline would be able to meet nearly three-quarters of its current liabilities by liquidating all its current assets. Significant items on the liabilities’ side of the balance sheet included current and non-current borrowings and lease liabilities in the amount of USD 13.9 billion – an increase of 1.8% against the previous financial year.

    In line with its strategy to increase capacity through a young and efficient fleet, Emirates received a record of 35 wide-body aircraft, consisting of 19 Airbus A380 and 16 Boeing 777-300ER, during the 2016/2017 financial year. At the same time, the airline also retired 27 older aircraft, bringing the average fleet age of 6 years 2 months down to 5 years 3 months, which is well below the industry average of nearly 12 years. To fund its fleet growth, Emirates raised USD 7.9 billion (AED 29.1 billion) during the financial year through finance and operating leases as well as term loans. Over the last ten years, the operator raised more than USD 47.3 billion (AED 173.7 billion) for aircraft financing.

    In the 2016/17 financial year, Emirates launched services to six new passenger points (Yinchuan and Zhengzhou in China, Yangon in Myanmar, Hanoi in Vietnam, Fort Lauderdale and Newark in the US). These new destinations add to Emirates’ well-balanced regional distribution, whereby no region represents more than 30 percent of overall revenues. In line with increased demand, the operator added frequencies and increased capacity to several existing destinations of its global route network, which spanned 156 destinations in 83 countries by fiscal year end.

    In June, the airline won the World’s Best Inflight Entertainment award for a record 13th year at this year’s Skytrax World Airline Awards, which are considered a global benchmark of airline excellence. Nearly 20 million passenger reviewed over 320 airlines.

    In July, Emirates announced that it is entering a broad partnership with low-cost operator Flydubai, which will include a codeshare and optimization of the airlines’ networks. Both carriers are government-owned, and the move aims to reduce unnecessary competition, enabling Emirates to benefit from Flydubai’s single-aisle operations. Between them, the airlines operate routes to 216 cities with networks that overlap to an extent. However, they expect to be serving 240 destinations as a combined operation by 2022, with a total fleet of 380 aircraft.

    In August 2017 Moody’s Investors Service (Moody’s) downgraded its Class A rating assigned to the Certificates issued by DNAFA, a subsidiary of the Company, to Baa1 from A3. The Class B rating remains unchanged and the rating outlook is stable. According to Moody’s, the downgrade reflects that the market for the A380 has weakened since the transaction was first rated in 2012, which increases market risk and potentially, the sufficiency of collateral coverage under a certificate default scenario. It was further confirmed, that Moody’s long-term view on the credit quality of the airline remains unchanged from the time the EETC rating was assigned. Moody’s also used delivery date values that were approximately 20% (USD 45 million per aircraft) below the lower of mean or median values of the transaction appraisers when rating these transactions. Moody’s expects improvements in the equity cushions with upcoming amortization payments and the rating agency expects that the A380 will remain integral part to the carrier’s network strategy.

    Market data from Reuters indicate that the downgrade by one notch did not result in an increased risk perception of potential investors in the EETC issuance of the Company. The spread in the market over the interbank swap rate for the corresponding weighted average life has actually narrowed for both the Class A and Class B Certificates post the rating downgrade.

    Source: ch-aviation, CNN, Emirates, FlightGlobal, Moody’s Investors Service, Reuters

    4. Aircraft – A380

    By mid-September 2017, Emirates operated a fleet of 97 A380s, which currently serve 47 destinations within its global network via its hub in Dubai. A380 destinations include: Amsterdam, Auckland, Bangkok, Barcelona, Beijing, Birmingham, Brisbane, Casablanca, Christchurch, Copenhagen, Doha, Dusseldorf, Frankfurt, Guangzhou, Hong Kong, Johannesburg, Kuala Lumpur, Kuwait, London Gatwick, London Heathrow, Los Angeles, Madrid, Manchester, Mauritius, Melbourne, Milan, Moscow, Mumbai, Munich, New York JFK, Nice, Paris, Perth, Prague, Rome, San Francisco, Sao Paulo, Seoul, Shanghai, Singapore, Sydney, Taipei, Tokyo, Toronto, Vienna, Washington, and Zurich.

    As of mid-September 2017, the global A380 fleet consisted of 215 commercially operated planes in service. The thirteen operators are Emirates (97), Singapore Airlines (19), Deutsche Lufthansa (14), Qantas (12), British Airways (12), Air France (10), Korean Air Lines (10), Etihad Airways (10) Malaysia Airlines (6), Qatar Airways (8), Thai Airways (6), China Southern Airlines (5), and Asiana Airlines (6). The number of undelivered A380 orders stood at 102.

    Emirates expects the delivery of its 100th A380 later this year. The increasing number of superjumbos allows the airline to increase the number of A380 destinations as well as frequency on existing routes: From March 2018, the carrier will add a fourth daily A380 service from Dubai to Sydney, which will increase the capacity for Emirates’ Australian services by more than 7%. Also from March 2018, the carrier will upgrade its third daily flight between Dubai and Melbourne from a Boeing 777-300ER to an A380. From October this year, Emirates will make its second daily flight to Moscow an A380 service.

    In August 2017, Emirates commenced Hajj services. The airline operated 45 additional flights to Jeddah and 12 additional flights to Medina between 17 August 2017 and 11 September 2017, in addition to its regular three time daily Jeddah and twice daily Medina frequencies. The A380 was used to support the increased demand to Medina during this time. Emirates anticipated a total of 2 million pilgrims traveling to Mecca, 20,000 of which would fly with Emirates from destinations such as Yangon, Manchester, Mauritius, Jakarta, Karachi, Lagos and Nairobi.

    Speaking during the Aviation Festival event in London on 7 September, Emirates president Tim Clark stated that the airline will capitalize on its flexibility in order to compete with long-haul, low-cost operators. Clark noted that Emirates’ fleet of 97 A380s would enable the airline to “compartmentalise” by offering “three or four economy classes” on the main deck alone. This would allow Emirates to match long-haul, low-cost operators in their base price while still being to offer additional enhancements.

    This summer, Airbus presented a development study for an enhanced A380, called “A380plus”. It includes aerodynamic improvements like large winglets. An optimised cabin layout would allow up to 80 additional seats.

    As a result of weak sales, Airbus announced that it will cut A380 deliveries in 2019 to eight aircraft. The production rate for 2018 remains at 12 aircraft. Airbus is expecting only a relatively small impact from the cut in production rate, as a result of its continuing effort to bring down fixed costs associated with the programme.

    Source: Ascend, Aviation Week, Bloomberg, CAPA, Emirates, FlightGlobal, iflyA380, MarketWatch, Reuters